The recent case of Dawson v Dawson [2019] NSWSC 826 recently handed down by the New South Wales Supreme court serves as a solemn reminder of what can go wrong when families, particularly blended families, with SMSFs, are in conflict with incomplete documentation.  In this blogpost, we explore the circumstances of the case and what lessons can be learnt to avoid the cost and trauma that such case presents.

The Facts

The Dawson Superannuation Fund was established in 2005 by the late Peter Robert.

Dawson and his wife, Estelle Dawson who were members and trustees of the Fund. Prior to Peter Dawson’s death, and in June 2013 his son, Tony Dawson (the plaintiff), was appointed his father’s Enduring Power of attorney (EPA). Due to the onset of Dementia, in March 2014 the plaintiff became a trustee of the Fund in Peter Dawson’s place with the plaintiff and his mother Estelle Dawson as the trustees of the Fund.

In early 2012, Peter and Estelle Dawson separated which resulted in family court proceedings. Those proceedings were resolved by Consent Orders made in March 2014 that involved the sale of certain property within the Fund and with the intention that Estelle Dawson would rollover her interests in the fund of approx. $800,000 to another fund.

Peter Dawson died on 24 November 2015.  At the time of his death he left a Will ( made in October 2012) leaving all of his estate to Estelle and appointing Estelle’s son in law George Holland as executor, a fact that Peter Dawson had apparently overlooked up until his death.

As far as the Fund was concerned, George Holland’s role as executor was not discovered until April 2018 when the accountants for the Fund invited the plaintiff to sign a Deed of Confirmation. Up until then, they mistakenly assumed that the plaintiff (son) was the executor of the estate. The Deed purported to ratify the appointment of the Executor, George Holland as a trustee of the Fund and to replace the plaintiff with retrospective effect from the date of Peter Dawson’s death – an appointment that the plaintiff disputed.  Despite the plaintiff’s refusal to resign as trustee, the executor and Estelle Dawson signed the Deed of Confirmation with the intention of taking control of the Fund.

Let the legal proceedings begin…

As a consequence, the plaintiff issued legal proceedings against his mother and the executor out of the NSW Supreme court to challenge their attempted appointment as trustees of the Fund, arguing that the executor’s appointment was invalid. The plaintiff also issued a family provision claim challenging his father’s Will and his estate being paid entirely to his (estranged) mother.

What was at the heart of the dispute was control of the Fund and the payment of Peter Dawson’s death benefits totalling approximately $1,400,000. At the time of his death, Peter Dawson had not made a Binding Death Benefit Nomination which would have stipulated how his superannuation interests in the Fund were paid.

The executor’s position was that he and Estelle Dawson were the correct trustees of the Fund since Peter Dawson’s death. They argued that as the EPA ceased on death, the plaintiff’s appointment as trustee also ended and that the executor’s appointment as trustee was necessary in order to satisfy the requirement of s.17A of the SIS Act and this appointment continued until all of the death benefits had been paid out (Peter Dawson’s death benefits in the Fund had not been paid out earlier because of the apparent delay associated with selling a number of landholdings and a dispute in relation to the sale of a hotel property within the Fund).

The decision

At the conclusion of the case, the court agreed with the plaintiff. It undertook a detailed review of the Fund’s trust deed and how it managed the process for the appointment of a trustee to the Fund.  As a result, it came the following conclusions:

1. Consistent with the Fund’s deed and the SIS Act, the plaintiff was by definition a “Legal Personal Representative” (LPR) as he held the role of EPA for the deceased member;
2. The plaintiff’s appointment as trustee was a personal role which did not cease on the death of the member, even though the EPA ceased on death.
3. There was no express power in the trust deed that ended this role on the death of a member, nor was there any other power in the deed that would operate to terminate the plaintiff’s role as trustee. The deed allowed for an LPR to be appointed in the circumstance of the member becoming of unsound mind or on death with the same powers as the member who ceased the office of the trustee;
4. The plaintiff was entitled to hold the office as trustee for the deceased member until he ceased office or when he died or became of unsound mind.
5. The role of trustee of the Fund is a separate roll to that of an Attorney, appointed under an EPA;
6. The court agreed with the defendants that although not strictly relevant to the outcome of the case, the fund remained a two-member fund until the death benefits commenced to be paid out and this had not occurred at the time the case was presented to the court. The court agreed with the plaintiff that if the fund was a two-member fund, the plaintiff remained as trustee as the deceased member’s “legal personal representative” for the payment of his father’s death benefits; and
7. Estelle Dawson did not have the power under the trust deed to appoint her son in law executor as a trustee, without the consent of the plaintiff.

Important lessons from the case

The Dawson case is a salient reminder of the way courts will approach disputes relating to SMSFs and the importance of the fund’s trust deed and associated documentation.

The Dawson case has again shown that a court will carefully review the provisions of the trust deed relating to the appointment of trustees as a matter of strict trust law. Consistent with the case of Ioppolo v Conti [2015] WASCA 45, the Dawson case has found that the provisions in section 17A of the SIS Act relating to the appointment of an executor as replacement trustee on the death of a member is permissive and not mandatory.

Also consistent with the Cases of Re Narumon, Cantor Management and Perry v Nicholson, the court will carefully review the SMSF documentary trail and the validity of previous deed upgrades, trustee resolutions (decisions) and how they impact on the validity of any current death benefit nomination.

Practically, what this means is that if an Attorney appointed by an EPA is appointed as replacement trustee during the period of incapacity of a member, and the member later dies, unless the trust deed of the Fund specifically terminates the attorney’s role as trustee, they will remain in office as trustee for the purposes of the payment of the deceased member’s death benefits. In circumstances where there is no valid BDBN, they will be able to exercise a discretion, made in good faith and for a proper purpose, to pay out the death benefits to any person who qualifies as a “dependant” for SIS purposes, which can includes themselves.

What the Dawson case also shows is how important it is for clients to ensure that the person who is to benefit most from their super on death should be able to have effective control of the fund following the death of that member. While Peter Dawson had not made a Binding Death Benefit Nomination, advisers and fund members should also be aware that cases have previously shown just how easy it is for a BDBN to become invalid as a result of a simple clerical error or not following procedure.

This a key reasons why the appointment of a ‘Fund Guardian’, for example (as provided in the Smarter SMSF deed) can be one means of safeguarding a rogue attorney from exercising control of the fund on death.

Further, we continue to see many clients assume that their executor will control superannuation death benefits as part of the administration of their estate, but the Dawson case shows how these intentions can fail, particularly if the Attorney and executor are different persons.

And finally, the Dawson case is also an important reminder that individuals should be reviewing their Will following separation or divorce and that they ensure that they have a current and valid Binding death Benefit nomination in place, made strictly in accordance with the current rules of the Fund, particularly where there is family conflict surrounding an SMSF.